Gold has significantly shaped the history of man, his economics
and his over all perception of life to being a simple hunter gatherer to
a man who is driven by the power of capitalism and understands the
value of wealth and its possession. Gold when discovered nearly 40,000
years ago when Paleolithic man picked up a piece of rock which had gold
deposits in it. Gold had never helped man develop tools of his early
needs like arrows or spears or even for agricultural purposes. Being
malleable, soft it did not have much use with early man. Bronze
discovered about 10,000 years and silver later, were valued much more
compared to gold which was discovered much earlier. A bright yellow
illuminating object that may have caught the attention of early man was
often traded as a valuable piece of object much later on as the system
of barter did not have a place for gold nor was it used. Gold was
probably used in some form as a shiny object that could have been used
to some extent in jewelry and even for scaring the enemy when engaged in
war. But it was only recently about 5000 years ago when the social
status was devised and man divided the society into classes that he
understood that this is a rare metal and thus precious and started using
it in more aesthetic manners including jewelry, for worship and for
trade. Gold started to be considered as a mark of royalty or power and
richness and became a prerogative of the high and the powerful to be
owned. Gold has always been considered to be incorruptible without
blemish. In some cultures gold is synonymous to the power of the sun.
The Aztecs and the Incas believed that gold came from the sun,
considering it to be its sweat and excretion. The mighty and rich
Egyptians considered there kings to be direct descendants of the sun and
gold as the one true flesh of that king. Thus gold had a significant
impact upon all these ancient empires and their cultures. The Egyptians
at about 3000 BC were the first to start a monetary system entirely of
gold and silver. Their power and influence across the Nile grew with the
discovery of the Nubian gold mines. Exploitation of the Nubian mines
lead to unimaginable wealth and the establishment of the first true
great empire of the world. The Egyptians had established a system of
economics and the first monetary exchange based on gold and silver and
thus creating an economic order based out of currency and not barter.Trade and the development of barter
Even
since man has had the realization that he alone cannot provide for
everything that he needs, he understood the importance of trade. When
there was no money, people still traded using whatever they could lay
their hands on. Shells, fruits, crop, and anything that was important
and has some sort of value attached to it would be traded. This gave
rise to a system of trade that we call as barter. Man would exchange a
hunt with another for getting wine, exchange wine for clothes, and
clothes for any tools that he would need. Generally the chief item of
trade among the people of Asia and Europe was cattle. Cows and oxen were
traded as means of exchange for goods and services rendered. This
resulted in the specializations of trade and men started living in
societies where each man had a role to play in the larger scheme of
things. So a potter would still be able to east without knowing how to
grow crops and a wine maker would have the pitchers that he needs to
store his wine without having the know how. A common form of sustenance
thus resulted in what we call as society. In some societies, still
today, people would trade using items and not money as in coinage and
paper currency. Precious metals came after cattle and started to be used
as a supplementary form of exchange and then slowly took over as the
primary form.
Why money was needed?
During
the days when barter trade was prevalent every item would have a fixed
exchange rate compared with the other items that were traded. 1 bag of
rice for 2 new clothes, 20 bags of rice for a cow and so on. However in a
simpler trading situation this would have been possible where the
number if items on exchange were few. When the market expanded, things
became complicated and more and items were started to be traded. Barter
became complicated because hundreds and thousands of items now needed an
exchange rate to be traded properly. This gave birth to money. When
money was introduced, every item in the market had a fixed exchange rate
based on a unit of currency or money.
Rise of gold as an international standard, why it was popular?
Gold
has always been accepted universally. It has significant value attached
to it which is why people readily accept it as a form of payment. The
significance of gold as an international standard of payment rose when
it was accepted internationally as a form of payment. This was during
the hay days when gold standard operated as a basis of international
payments. However the International Monetary Fund took gold out of the
equation and ensured that it no more plays a significant role. Gold as a
means of reserve in the international market fell from nearly 70% to a
mere 3%.
During the years 1880 to 1914 gold formed the basis of
payment internationally. All currencies were valued to a fixed amount of
gold which was held in reserve. The governments would have to repay the
amount of the printed currency in gold when presented. This was done to
ensure that the paper currency which was in circulation has a fixed
value and the governments would not print excessive amounts of paper
currency and thus create cheap money in the process. The basic idea was
to restore the confidence of the people on the circulated paper currency
and ensure the survival of it.
However the international gold
standard started to dwindle out and by 1913 the United States had about
90% of their money supply from paper money and demand deposits. However
the scenario again changed after the first Great War. Post the First
World War, there was a popular sentiment which wanted the old gold
currency to be restored. High inflation and taxation had the entire
Europe and America reeling. The United States was the first country to
return back to the gold standard. This was followed by several European
nations who also returned back to the gold standard. However during the
First Great War the economies had been hit severely. The pressures of
having run the war for years, the economies started to find the pinch
and slowly started to detach themselves from the gold standard.
1934
was the year when the United States reeling under the pressures of the
Great Depression, introduced the Gold Reserve Act. It practically gave a
monopolistic control over possession of gold in the country to the
government of United States. Private possession of gold was banned. The
price of gold was sent to $35 an ounce and the dollar was devalued as
well. The idea was to boost the economy by inducing production when gold
was made rare in the market.
During the 1944 when most of the
world was battling the Second World War, representatives of 44 allied
nations met at Bretton Woods, New Hampshire, for a conference held
between July 1 and July 22. Their goal was to establish an international
monetary body which would ensure that there is a set monetary exchange
system among nations at a pegged rate. This led to the establishment of
the International Monetary Fund and the International Bank for
Reconstruction and Development. Gold was at that time the dominating
metal and as such was considered to be the basis of the international
payment currency. At that time most of the European nations were in huge
debt and they started transferring their gold to the United States.
This made the US Dollar appreciate greatly. Thus in the later years the
US dollar become the dominating currency. US dollar at that time was
backed by Gold and an exchange rate on gold was determined which led to
it becoming the preferred currency of exchange.
However major
countries like France and England started selling of their US Dollar
reserves and traded them for gold from the US treasury. This led to a
considerable decrease in the power of the US dollar in the international
market. Added to this was the considerable strain put on the US economy
during the ongoing Vietnam war which lead to the then President Nixon
to stop the full convertibility of the US dollar to gold. This was the
trigger that upset the whole Bretton Woods system.
With the
collapse of the Bretton Woods systems in USA in 1973 ordinary citizens
were no longer under the ban to purchase bullion and or invest in it.
The abolishment of private possession of gold completely came off in the
year 1975. Similar bans were also in existence in UK and Japan which
also came off in the years 1979 and 1973 respectively. The world over
liberalization of the private purchase of gold lead to some countries
becoming major exporters and the yellow metal. Countries like Turkey,
where gold import was previously banned, saw its domestic, gold prices
jump 85% following the lifting of the ban on imports.
Why the Gold Standard to some extent was advantageous
A
significant reason for the Gold Standard to be successful is that it
provides absolutely no chance of a hyperinflation. The reason is that
gold is tied to the currency and as such until the whole stock of gold
was increased additional money could not be printed. In the hindsight
that is the very reason why the US economy could not come out of the
great depression of 1929 rather quickly. Since the money was tied with
the gold, the US government had to look for other opportunities and
tried to attract the foreign investors who would bring in their
investment in the form of gold. Interest rates were increased for the
investors and that means higher and more prohibitive interest rates for
the domestic borrowers.
Another important advantage of the gold
standard is that excessive printing of cheap money can be prevented
another anti inflationary method. This would ideally put the entire
money in circulation into a fixed price with the gold in reserve and
that evidently results in a pressure on the government to pay off the
amount in gold when demanded; a deterrent for printing excess money.
All
currencies of the world has been at one time of the other been formed
from the base gold and silver metals. The reason that gold and silver
became popular and is still valued and possessed as a means of
investment is that gold and silver are the only real currency that the
world has known that has survived the vagaries of millennia's of
political and economic turmoil. They were of great intrinsic value
unlike the paper currency and can be exchanged easily for commodities
and are widely accepted. However in the last few hundred years or so,
paper currency of "Fiat" currency as we call it has come into existence
and has taken over. Paper currency when it first started off was
attached to this base gold currency. People knew that the exchange rate
was fixed and one can trade in confidence as they were backed by gold.
The fact that they were later detached from gold and silver, made them
lose their confidence in paper currency. Say you are trading eggs for $4
a dozen in Seattle on Monday. If the price of eggs increases to $5 a
dozen on Thursday you will probably wonder whether you are dealing at
the right price. It is the confidence in a paper currency that makes it
work.
Why gold has been a popular method of savings
In
the 1920's if you wanted to buy a new pair of trousers you needed
probably $10. Whether you spend that using a $10 printed currency note
or use a $10 worth of gold coin it was irrelevant. In 2011 if you want
to buy a trouser, that same $10 gold coin will buy you the pair of
trousers but the $10 printed note will be useless. The reason is gold
has an intrinsic value. To a large extent the prices of gold and for
that matter even silver has not seen a downward spiral even during the
greatest of depressions. Sometimes though the price of gold has
certainly swayed but the same can be said of all precious materials and
other commodities. During the Gold Decree the price of gild was fixed at
35 dollars to an ounce. Even the purchase price before that was fixed
at a little over 20 dollars. In both these cases the price was set by
the government of US and not due to market dynamics. During the last
great depression even when most of the stocks took a beating and some
more than 70%, gold stocks increased to over 400% and gave dividends to
their investors. The two largest gold producing mines in USA and Canada
managed to do this which speaks volumes about the persistence and
strength of gold in any market situation. Thus people have always
preferred gold as a mode of savings. It is like saving their money
securely which is not going to devalue over time and waiting till the
investment weather is good for further diversification of the portfolio.
Another
reason why gold is a good investment option is the diversity that it
brings to the overall portfolio. An investment expert will never ask you
to put all your money in a single stock or investment option because of
the inherent risks that it brings to the portfolio. A diversification
is required to spread the risks. Gold being a hard currency gives more
intrinsic value to your portfolios and credibility to it.
A
significant disadvantage of gold is that it does not give dividends and
the price of gold during an inflationary process is what provides the
increase in the investment. It is more of the safety and stability of
the investment which encourages buying gold. The remarkable nature of
both gold and silver.to hold their prices and remain steady even though
there is a considerable price deflation all around means that when you
invest in gold your investment though not necessarily going to provide
an immediate return, will provide a considerable gain of wealth when
your compare the prices after some time.
The comparative price of
gold to other commodities in the market has always been better. The Dow
Jones Industrial Average has always been competitive with the price of
gold. Even during a depression, when the prices of all commodities have
gone down, the price of gold which may not have increased to more than
what you had paid for it in the first place, the comparative price is
more than what other commodities are. This can be further explained
using a small example. Imagine that today you have purchased 20 ounce of
gold (this is just a comparison). If you wish to purchase a car, only
about 10 ounce will buy you a luxurious sedan. However another few years
of waiting and the same sedan can be bought for only 15 ounce of gold.
This is because of the price of gold which has gone up significantly
compared to the other products in the market.
One aspect of
investing in gold, silver, platinum and palladium the main four precious
metals that you can buy, is the storage costs that you need to take
into consideration. Physically buying gold and storing them a location
that is under your control is not advisable because of the inherent
risks of it. As such when you open a holding account online or with a
bank they will offer you the storage options at a nominal cost. When
investing precious metals, the cost of storage is also to be taken into
consideration. Any cost which is prohibitive for storage must be
considered against the inherent gains that the holding will provide
after a period of time. An estimated storage costs for holding gold is
0.015% from 1 to 49,999 gold grams stored in at London, Zurich or Hong
Kong. The costs also include the insurance coverage against theft for
the investment.
Comparatively the regular basic savings and other
investments options would appear more attractive as they don't require
storage costs, but the fact remains that their volatility in a negative
market situation works to their disadvantage. A soft currency investment
option is never a hard currency and lacks the intrinsic value that hard
currency like gold, silver, palladium or platinum has. Thus when
markets crash the inherent depreciates overnight and people lose their
life's savings. Gold on the other hand is a reserve currency which is
accepted under any market situation and as such a better option.
Gold crash vs. hyperinflation
Gold
is one commodity that has always been looked with confidence by the
investors. An interesting fact about gold is that there is not much of
it in the market. As such if paper money becomes obsolete tomorrow and
the only mode of accepted payment becomes gold or silver, then we the
people who does not possess gold but only electronic balances of money,
will have no where to go. If we rush to buy gold all the gold and silver
and other precious metals would have been gone. So basically all our
huge savings, investments and bonds will have vanished. A printed paper
currency which is being produced in much quantity as required by the
economy cannot be relied and the only thing that will matter when paper
money fails is what you have in intrinsic value that is gold. One of my
colleagues had once said me, "gold at $1000 a once, this is not a price
one should invest into something." However the fact remains that it is
not the price at the end of the day that counts, but the intrinsic value
that you possess. Paper money in itself does not worth anything; gold
does. Thus when paper money will become defunct, the only things that
will remain of value are the precious metals.
Irrespective of
that, gold prices have also suffered a price deviation. In recent years
as during the depression of 2008, when commodity prices were going down
and the real estate and financial markets crashed, people started to
sell off their investment and hoard up the dollars. Even the price of
the yellow metal, which was otherwise so popular, also went down. People
started to sell of their gold investment and realize the investment in
cash. This resulted in gold prices falling by about 30 percent in
November of 2008 from the March 2008 price of $1000 per ounce.
A
real possibility of gold crash could be if and when there is a sudden
increase in the supply of gold in the market. Due to inherent rules of a
demand and supply of any commodity in the market which drives the price
of it, gold prices can severely depreciate if there is a significant
rise of the supply of gold in the market. However for the last few
decades there has not been a single discovery of a gold deposit that is
easily accessible in an area where there is no conflict or political
instability to encourage an increase of gold supply into the market. It
is unlikely something of that sort happening in the near future.
There
has been no dearth of speculation as to where the price of gold will
reach in the next few years. The internet is abuzz with speculations and
predictions. Some people have predicted a $3000 value per ounce for the
precious metal not something that is entirely impossible. Other market
experts have even predicted a $10,000 value of the yellow metal.
However, it is any body's guess to predict which way gold prices are
going to go.
Again some schools of opinion say that anything that
is being traded and is consistently rising in price has the tendency to
correct itself out at one point of time. Just like in a share market
which has hundreds and thousands of companies listed and their shares
traded. Evidently the shares being traded are only limited in numbers
and the company's cannot keep adding more and more shares as they are
being traded. Thus sooner rather than later a situation will arrive when
the shares of the company's will rise to a level that no one will be
able to invest in them. However nothing can simply go on increasing
indefinitely and as such price will stall at one point of time. There
will be a price fall after that. As soon as prices start to fall, people
who have invested their life's savings will want to cash out and escape
the tumbling share market. What follow is more sellers in the market
than buyers. Prices will tumble and values will get eroded overnight. A
once booming market will then be followed by a recession. Recession will
follow simply because there will be less money in circulation. People
who have lost their savings will have but no option but to hold on to
what they have and thus the market will have significantly less demand
for goods and services.
Hyperinflation has its own effects on the
economy. A simple explanation of hyperinflation is when there is a large
increase of money in the market which is not supported by the GDP of a
country that means more purchasing power than can be supplied with the
availability of goods and services, hyperinflation sets in such
conditions. One way to explain a situation like this is by giving an
example. Say there is a massive crop failure. Consumers need the goods
but they are unable to buy it because of the minimal amount in supply.
Thus the prices of the goods are going to go up.
In the modern
world, governments of the world has the power to print money as they
wish and that has been possible because of the absence of a pegged
exchange rate to an object of intrinsic value. Thus in order to correct
the problem of job cuts and to revive the economy, governments are
spending billions of dollars. One would imagine that this would come
from taxes but in an economy which is already reeling with absence of
jobs and there is no real inkling of hope that jobs are getting back in
drones, increased taxes will only add to the misery. Thus governments
are resorting to other forms of funding which is to print more money.
Indirectly they are also fuelling the inflationary forces.
An
increasing price of gold can be attributed to a bubble that is being
created because of the gold mania that we are currently experiencing.
Some speculators are expecting gold prices to touch $5000 an ounce and
every body seems to be coming out with a speculation of their own and
the internet is abuzz these days. We are currently seeing the same kind
of mania that we had before the economy took a down turn when the real
estate markets crashed. Why would the gold price be a mania, you ask?
Gold is in a relatively fixed amount of production. It is one metal that
has a limited supply and the production is also limited based on the
availability of the gold mines around the world. However contrary to the
supply demand is ever increasing. We all know that gold has an
intrinsic value and is along with other precious metals like silver,
palladium or platinum is readily accepted world wide and is treated as a
reserve currency. Even if all Fiat currencies fails to become confetti
and the banks fail around the globe the real possession value of gold is
not going to fail and it will continue to be accepted. Thus the
understandable urge to possess gold as a reserve asset. However the
supply of gold is not going to increase to the demand of the consumers
and thus the prices will continue to be pushed beyond the limits of a
common man. The same way when the property prices went on into a
dizzying height and pushed the real consumers out of the market due to
the influx of speculators and then crashed miserably when defaults
started happening similarly gold prices will stall at a point. If it
starts to go down as the market starts to correct itself, we can see a
recession setting in or at least a bear market.
An improving job
market and a strengthening dollar can see a correction in the gold
prices as has been seen in the first quarter of the year. As per a
report from the Bureau of Labor Statistics non farm payrolls have
increased by 216,000 which is higher than the consensus expectation of
185,000. This immediately saw dip in the gold prices with investors
cashing in on the yellow metal and migrating to stocks instead.
Investment in Gold via Dollar Cost Averaging
Since
the intrinsic value of gold is never challenged and the fact remains
that it is a true reserve currency to the world, an investment in gold
at any point (unless it is going over the roof and is due to correct
itself imminently) is a safe method to store your net values. One way to
ensure that the value of gold your investing is averaged out and
represents a lower end of the price rise is to employ a method of Dollar
Cost averaging. You invest a fixed amount of money periodically over a
fixed period of time. This in a rising gold price market initially will
bring in more gold than the later investments. The benefits of this
system is that over a period of time when the markets fluctuate, your
investment is going to be marginalized and you will suffer less than if
you had invested the entire amount in one go.
A lot of brokerage
firms will offer this service using an automated debit system from your
bank. That way you don't have to actually do the transactions manually
and have to remember yourself to make the payment every time it is due.
Else you can manually make the payment.
Purchasing Gold using Value Averaging
Gold
has been one of the many and by and large a popular method of storing
assets and values. It is one of the few precious metals which are rare
and have an intrinsic value attached to it because of its rarity. This
is what makes it more susceptible to fall back to when there is a market
crash as we saw in 2008. Real estate was another such market but when
the real estate market crashed devaluing values held in such assets,
people had to fall back on the time tested yellow metal for salvation.
A
lot of people have experimented using the Dollar Cost averaging and the
Value Averaging methods of investing in the yellow metal. While we have
discussed abut dollar cost averaging in the previous chapter, we will
discuss about value averaging here. Value averaging is somewhat similar
to dollar cost averaging, in terms of the over all approach of investing
on a monthly basis. However it differs to the former by the fact that
the investment is directly in proportion to the fluctuations that the
investment has had in between the two investment dates. Say a person has
invested in some stocks to the tune of $5000. He has set an amount of
$100 for the investment to grow by the next month when the next
investment date is. Say on the day the additional investment is to be
made; the total price of his investment has increased to $5057. That
means he has to make an additional investment of only $43 to raise his
total investment to $5100. Similar to a dollar cost averaging method, in
a market where the prices are increasing, one has to buy fewer shares
and more when the prices are going down. The value wise difference
between the two methods has not been too much in a same period of price
fluctuations. This method can be gainfully used in the manner of
investment into Gold. When the price is lower amount invested will buy
more quantities of gold then when the price is higher. However over a
reasonable period of time the cost of gold acquired will be marginalized
reflecting a lower price.
Ways to invest in Gold and Silver
Gold
can be purchased either as a physical holding of bullion, coins or
jewelry or a stock held at a secured vault holding some where else. A
lot of registered gold firms sell gold coins and bullion accepts
applications. Ensure before investing in gold through one of these
companies, to check with the better business bureau and find out more
about the company and its background.
Find the current price of
gold and silver over the phone and find out everything that you need to
know before placing the order. Once you are satisfied place the order
and confirm it when it is verified by either phone or email. Once the
order is verified, make the payment using a wire transfer to check
payment and wait for the confirmation of the purchase being made.
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